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Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? (Do not round intermediate calculations. Round final answer to two decimal places.)

Respuesta :

opudodennis

Answer:

$10.76

Step-by-step explanation:

Present dividend, [tex]D_{1}[/tex] is $2.5

Expected dividends for the next 1, 2, 3 and 4 years denoted by [tex]D_{2}[/tex], [tex]D_{3}[/tex], [tex]D_{4}[/tex], [tex]D_{5}[/tex], respectively will be

[tex]D_{2}[/tex] =$2.5(1+0.07)=$2.675

[tex]D_{3}[/tex] =$2.675(1+0.07)=$2.86225

[tex]D_{4}[/tex] =$2.86225(1+0.07)=$3.0626075

[tex]D_{5}[/tex] =$3.0626075(1+0.07)=$3.276990025

Present value will be

[tex]$2.5/(1.1)^{1} + $2.675/(1.1)^{2} + $2.86225/(1.1)^{3} + $3.0626075/(1.1)^{4} + $3.276990025/(1.1)^{5}[/tex]

$2.272727273 + $2.210743802 + $2.150450789 + $2.091802131 + $2.034752982 = $10.76047698

Rounded off to 2 decimal places we get $10.76

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